Egypt ETFs Potentially Messy Situation

Don Dion

Thursday, 3 Feb 2011 | 2:00 PM ETThe Street

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The political protests taking place in Egypt have captured the attention of the world and spurred investor demand for exposure to this nation.

In the aftermath of President Mubarak's decision to not run for reelection, there has been some evidence that has indicated tensions in the nation are cooling. For instance, on Wednesday Reuters reported that Egyptian credit default swaps have seen a noticeable retreat from the week's highs. Additionally, Internet service has reported been returned to parts of the nation. Ultimately, however, the situation remains tense as protestors clash on the nation's streets.

In the coming days Egypt is sure to remain in the headlines as analysts and market commentators around the globe debate what is in store for this nation.

Throughout the tumultuous past few days, an attractive destination for investors seeking Egyptian exposure has been the Market Vectors Egypt ETF .

Since Friday, droves of investors have been pouring into the fund, hoping to take advantage of the political unrest. This has led to a spurt of trading sessions during which EGPT's volume has neared or exceeded 1 million shares. This type of interest in the fund, however, is unusual given its history. Prior to the recent round of politically-fueled protests, the EGPT suffered from low investor interest represented by a dismal average trading volume.

The sudden interest in the EGPT has been exciting to watch and may bode well for the previously ignored fund's future within the Darwinian ETF universe. However, this product is one I would not advise investors to take advantage of at this time. At the start of this week, EGPT's parent company, Van Eck announced that EGPT's share creation had been suspended.

As we have seen in the past, when an ETF's normal share creation process is interfered with, investors can get caught in a messy situation.

With no new shares coming to market at this time, EGPT is no longer behaving as a traditional ETF should. Instead, the product is exhibiting features more typical of a closed-end fund. Halted supply combined with heavy demand has led EGPT to separate from its net asset value, resulting in the creation of a substantial premium which, as of Feb. 1, was over 12%.

In its press release, Van Eck expects to resume normal creation when the Egyptian Stock Exchange reopens. When this occurs, EGPT's premium will be wiped out and the fund will return to trading in line with its underlying index. Investors caught with exposure to the fund at this time will likely face a rocky ride.

Until it is returned to normal, investors should stick to the sidelines when it comes to this pure-play Egypt ETF. However, there are other internationally-focused ETF options investors can consider when seeking exposure to events taking place in this region.

The PowerShares Frontier Market ETF , the Market Vectors Africa ETF and the Guggenheim Frontier Market ETF are three products which set aside over 10% of their portfolios to this nation's marketplace and are not currently facing the same substantial premium.

It is important to note, however, that on top of being inherently volatile due to their exposure frontier markets, low volume plagues each of these funds. Those looking to move in and out of PMNA, AFK and FRN quickly could run into trouble. Therefore, investors must approach any of these funds with extreme caution.